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Annuities have not had a great time of it since the introduction of the pension freedoms, as many people have turned away from these guaranteed retirement income options. Enhanced annuities, designed for people with poor health or certain lifestyle choices, have fared particularly poorly, having fallen six times as much as standard rates.
Data from our latest Moneyfacts UK Personal Pension Trends Treasury Report shows that the average annual level without guarantee enhanced annuity income for a 65-year-old fell by between 4.8% and 5.8% (depending on the purchase price) in 2017. For those at the age of 70, average enhanced annuity income fell by around 6.8%, while at age 75 the reduction was even greater at between 5.3% and 9.9%.
Overall, average enhanced annuity income decreased in all but 17 of the 170 enhanced annuity scenarios analysed during 2017. In the past, enhanced annuities were a boon to those with certain health conditions or lifestyles, as they offered better income. While they still do, the gap between a standard and enhanced annuity rate is shrinking, with the last three months of 2017 seeing the average difference between the two fall from 16.7% to 12.1%. This is the lowest level seen since January 2013, when enhanced annuity providers adopted ultra-cautious pricing due to the switch to gender-neutral rates.
"Before pension freedoms were introduced, the enhanced annuity market was functioning well, with healthy competition ensuring a typical rate advantage of around 21%," said Richard Eagling, head of pensions at Moneyfacts. "However, it is difficult to escape the conclusion that the enhanced annuity market has been more adversely impacted by pension freedoms than the standard annuity market, meaning poorer retirement outcomes for those with shorter life expectancies retiring now, compared with those who did so pre-April 2015."
In contrast, 2017 was the first calendar year since 2013 in which standard annuity rates saw a rise. The average annual income for a standard level without guarantee annuity for a 65-year-old increased by 1.07% based on a £10K pension pot, and by 1.66% for a £50K pension pot.
Indeed, since pension freedoms were introduced in April 2015, standard annuity income has only fallen by between 2.6% and 3.2%, while average annual enhanced annuity income fell by between 10.2% and 14.2% for a 65-year-old (depending on purchase price) and by between 11.7% and 15.6% for a 70-year-old. "Nevertheless, it still remains the case that enhanced annuities offer valuable extra income for those who qualify for them, so they should not be overlooked," concluded Richard.
Consider contacting the Moneyfacts Annuity Service to find out if an annuity could be for you
Read our guide on enhanced annuities to see if you qualify
Find out how to choose the best annuity
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